Credit Suisse's quarterly profit tumbles

Swiss bank hit by charge, drop in trading revenue

By

KabirChibber

LONDON (MarketWatch) -- Credit Suisse Group said Wednesday second-quarter net profit tumbled 37%, far more than expected, as the Swiss banking giant was hit by provisions for legal charges and a slowdown in trading and banking.

The company said net profit fell to SFr919 million ($721 million) from SFr1.9 billion in the 2004 second quarter. Revenue rose 3% to SFr14.1 billion on a year-over-year basis but fell 17% from SFr17.1 billion in the first quarter.

"Following a strong start to 2005, the second quarter was impacted by the anticipated slowdown in market activity and our banking businesses experienced low levels of client activity in April and May," said Chief Executive Oswald Grubel.

Credit Suisse said net new assets rose to SFr16.2 billion from SFr9.1 billion, bringing total assets under management to SFr1.27 trillion. Growth in new assets was driven mainly by China but with Switzerland also making a contribution, the group said on the conference call.

The institutional securities division recorded a SFr624 million aftertax charge to increase the reserve for private litigation involving Enron, as well as litigation surrounding some IPO allocation practices and research analyst independence.

The total reserve for litigation matters is now around SFr1.4 billion.

Javier Lodeiro, an analyst at Bank Sarasin & Cie, was shocked at the size of the second-quarter charge. "I would never have thought about that high a figure," he said.

Both Lodeiro and Dresdner Kleinwort Wasserstein were disappointed by results in the company's private-banking division. DKW said the unit's net profit was 10% below expectations, partly on lower gross margins, at 126 basis points compared to the broker's expectations of 130 basis points.

In institutional securities, considered by many the key division at Credit Suisse, Lodeiro said the quarterly results were below market consensus. "Revenue was not so bad," he said, "but the cost-income ratio is still too high."

Looking ahead, Credit Suisse expects a second-half improvement in equity markets, with interest rates moving within a narrow range for interest rates. "Credit Suisse is well positioned to benefit from this economic environment," it said.

"We expect the recovery in client activity in the banking business, which started in June, to continue," Credit Suisse added.

Lodeiro said that he's not that bullish on the second half for the Swiss giant but that assets under management were "extremely high" and provide a good basis for growing revenue.

In June, Credit Suisse said it will drop the First Boston name from its investment banking division and adopt a single brand with a new logo from the beginning of 2006.

The group will be streamlined into divisions made up of private banking, the corporate and investment banking arms and the asset management divisions.

On the conference call, Credit Suisse said it booked around SFr30 million in costs in the first half, mainly around merging various legal entities, due to the single branding.

Institutional, corporate

As a result of its one-off charge, the institutional securities division recorded a net loss of SFr408 million. Last year, institutional securities had a net income of 129 million euros.

Trading revenue in the division, particularly in fixed income, compared favorably to the second quarter of 2004 but was down from the first quarter.

Total trading-related revenue for the bank slid to SFr3.36 billion from SFr3.95 billion in the first quarter, though it rose from SFr2.69 billion in the year-ago quarter.

It did note, however, improvements from advisory services as well as equity and debt underwriting.

"Investment banking net revenues rose significantly versus the first quarter, with improved performances in advisory fees versus both prior periods and in debt and equity underwriting," the group said.

Corporate and retail banking net income rose 8% to SFr277 million. Revenue fell 10% to SFr858 million. "Strong revenue generation and a net release of provisions for credit losses were the main drivers of this result," the group said.

In private banking, net income fell 13% to SFr581 million, primarily on "small losses" during the quarter in interest-rate derivatives used in risk management. Profit fell 15% quarter-on-quarter on the fall in overall trading revenues as a result of lower income from trading execution.

Wealth and asset management reported net income of SFr245 million for the second quarter, up 81% from the previous quarter but down 19% from last year. Revenue rose 5% to SFr1.57 billion, reflecting investment gains from private equity realizations.

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